HSBC Savings Bank (Philippines), Inc. 2019 Annual Report .

Speaking up - We are comfortable in speaking up about concerns, even if they relate to our own mistakes,or highlighting things we feel are wrong. Views are sought and respected and when people do speak upappropriate action is taken.These standards are also important in promoting prudent risk-taking and fair treatment of customers, whichunderpin our culture.As a bank, we recognize that our success lies in putting the customer at the center of everything we do. Bydoing so, we ensure that we reinforce the importance of building and maintaining client relationships and theneed to comply with financial consumer protection standards and practices across HBPH. In the end, HBPH’sresponsibility starts and ends with treating customers fairly.HBPH’s Board and Senior Management has oversight responsibilities in the development and effectiveimplementation of HBPH’s consumer protection program. The program aims to: to demonstrate openness and accessibility in accepting customer feedback and complaints; to have robust procedures to ensure the proper handling and, where appropriate, prompt rectification ofcustomer complaints; to demonstrate HSBC’s commitment to service excellence, truth and fair dealing with its customers; to ensure that customer complaints are dealt with effectively and quickly, and; to comply with the letter and spirit of regulatory requirements and voluntary codes of conduct, whereapplicable.Notwithstanding the outsourcing of complaint resolution to the Global Servicing Center (“GSC”), the Head ofCustomer Relations and Experience (“CRX”) is responsible for the implementation of the complaints strategyand policy of HBPH including processes administered by vendors who act on behalf of the Bank.Feedback from customers (and the public at large) are captured in HBPH’s Customer Feedback ManagementSystem or “CFMS” to ensure that each is logged and monitored for action and resolution in a timely manner.Complaint handling turnaround time is based on whether the complaint is determined to be simple or complex;however, the process followed by the Customer Relations Team (“CRT”) in handling both complaint typesremains the same: (1) Initial Handling; (2) Investigation; (3) Acknowledgement; and (4) Final Reply.Management information generated from CFMS is utilized to determine the root cause of the major complaintareas of HBPH with the aim of revising policies and procedures to improve the customer journey as well as leadto impactful optimization initiatives.As a Group, HSBC aims to be where the growth is, enablingbusinesses to thrive and economies to prosper, and ultimatelyhelping people to fulfill their hopes and realize their ambitions.As a major international business, HSBC has an impact on people all over the world including customers,employees, suppliers, investors, and the wider communities it serves.As an organization, we understand the importance of our relationships with all these different groups whiletaking into account their needs and aspirations. We also recognize our duty to manage the impact of ourbusiness on our environment. Without doing this, we cannot thrive over the long term.Under the broad theme of supporting sustainable economic growth, HSBC’s sustainability strategy focuses on 3strategic areas, defined as the Group’s sustainability ‘Global Pillars’: Future Skills: Providing our customers, communities, and employees with the skills and knowledge neededto thrive in the global economy Climate Program: a 5-year global philanthropic initiative, focusing on identifying and scaling innovativeand impactful solutions to climate change, andHSBC Savings Bank (Philippines), Inc. 2019 Annual ReportPage 6

Sustainable Finance: Facilitate financial flows to support global sustainability goalsHBPH works with partners like International Care Ministries (ICM) to address these issues through support fordisaster relief initiatives and more importantly in helping to secure livelihood through education and soft skillstraining.In 2019, the Bank supported ICM in the implementation of Transform, a community-based adult educationprogram that focuses on building financial literacy and business skills for individuals in under-servedcommunities. Two key components of the program involved the distribution of small business starter kits as inkind micro loans and the formation of group savings clubs.In early 2020, we have worked with ICM to officially register and formalize one of our sponsored communities,Ibao Savings Group from Kalibo, Aklan with the Department of Labor and Employment (DOLE). Our effortshave allowed the Ibao Savings Group to expand quickly – from initially producing and selling householdcleaning products to venturing into retailing rice within their community.HSBC Savings Bank (Philippines), Inc. 2019 Annual ReportPage 7

We seek to maintain a conservative and consistent approach to risk, helping to ensure we protect customers’funds, lend responsibly and support economies. By carefully aligning our risk appetite to our strategy, we aim todeliver sustainable long-term shareholder returns.Active risk management helps us to achieve our strategy, serve our customers and communities, and grow ourbusiness safely. We identify risks to our business and assess their materiality by considering their likelihood andpotential customer, financial, reputational and regulatory impacts, as well as market conduct and competitionoutcomes. We manage these risks through a combination of limits and controls to ensure risks are within ourappetite. We then aggregate and report risk data to highlight material risks and support good decision making.Where necessary, these risks are escalated to senior management and risk governance committees to facilitatemanagement decisions, challenge and remediation.All employees are responsible for the management of risk, with the ultimate accountability residing with theBoard. We have a strong risk culture, which is embedded through clear and consistent communication andappropriate training for all employees. A comprehensive risk management framework is applied throughoutHBPH, with governance and corresponding risk management tools. This framework is underpinned by our riskculture and reinforced by our values and required conduct outcomes.Our risk function oversees the framework and is independent from the line of businesses, including our salesand trading functions, to provide challenge, appropriate oversight and balance in risk/reward decisions. Our riskappetite defines our desired forward-looking risk profile, informs the strategic and financial planning process,shapes our requisite controls and dictates risk behaviors.This is articulated in our Board-approved risk appetite statement including: risks that we accept as part of doing business, such as credit risk and market risk; risks that we incur as part of doing business, such as operational risk, which are actively managed to remainbelow an acceptable tolerance; and risks for which we have zero tolerance, such as knowingly engaging in activities where foreseeablereputational risk and misconduct has not been consideredInternal stress tests are important elements in our risk management and capital management frameworks. Theyinclude potential adverse macroeconomic, geopolitical and operational risk events, and other potential eventsthat are specific to HBPH. The selection of scenarios reflects our top and emerging risks identification processand our risk appetite. Stress testing analysis helps management understand the nature and extent ofvulnerabilities to which HBPH is exposed. We also perform regulatory stress testing to help ensure the strengthand resilience of HBPH.Our top and emerging risks framework enables us to identify current and forward-looking risks so that we maytake action to either prevent them from materializing or limit their effect. Top risks are those that may have amaterial impact on the financial results, reputation or business model of HBPH in the year ahead. Emergingrisks are those that have large unknown components and may form beyond a one-year horizon. If these risksoccurred, they could have a material effect to HBPH.We define Risk Appetite as the articulation of the level and types of risks that HBPH is willing to take inachieving its medium and long-term strategic goals. Risk Appetite provides the anchor between the business,strategy, risk and finance, enabling senior management to optimally allocate capital to finance strategic growthwithin tolerated risk levels. It provides a view on a medium to long-term horizon, and is not be used to monitorperformance against the Annual Operating Plan.It contributes significantly to a strong and integrated risk management framework and risk culture, helpingdirect and support sustainable growth against the backdrop of a heightened risk environment.Further, we utilize the Risk Appetite Statement (“RAS”), which consists of a qualitative statement andquantitative metrics covering financial and non-financial risks with defined Risk Appetite and Tolerancethresholds. It provides a baseline for business decisions based on balancing risk and return, and making the bestuse of our capital.HSBC Savings Bank (Philippines), Inc. 2019 Annual ReportPage 8

Risk appetite metrics are reviewed semi-annually and are fundamental to the development of business linestrategies, strategic and business planning and senior management balanced scorecards.Financial RisksCapital and Liquidity RiskThe risk of having insufficient capital, liquidity or funding resources to meet financial obligations and satisfyregulatory requirements, including pension risk.Credit RiskCredit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract.To manage credit risk, we ensure it is:i. measured as the amount which could be lost if a customer or counterparty fails to make repayments. In thecase of financial investments, the measurement of exposure takes into account the current mark-to-marketvalue to HBPH of the contract and the expected potential change in that value over time caused bymovements in market rates;ii. monitored within limits approved by individuals within a framework of delegated authorities. These limitsrepresent the peak exposure or loss to which HBPH could be subjected should the customer or counterpartyfail to perform its contractual obligations; andiii. managed through a robust risk control framework which outlines clear and consistent policies, principlesand guidance for risk managers.Market RiskMarket risk is the risk that the market rates and prices – interest rates, exchange rates, etc. – will move adverselyrelative to positions taken causing losses to our portfolios.Exposure to market risk is separated into two portfolios: trading portfolios comprise positions arising from market making and warehousing of customer-derivedpositions. non-trading portfolios comprise positions that primarily arise from the interest rate management of ourretail and commercial banking assets and liabilities, financial investments designated as available for sale.Market risk is: measured in terms of value at risk, which is used to estimate potential losses on risk positions as a result ofmovements in market rates and prices over a specified time horizon and to a given level of confidence,augmented with stress testing to evaluate the potential impact on portfolio values of more extreme, thoughplausible, events or movements in a set of financial variables; monitored using measures including the sensitivity of net interest income and the sensitivity of structuralforeign exchange which are applied to the market risk positions within each risk type; and managed using risk limits approved by the Group Management Board (“GMB”) for the Ultimate ParentCompany and various global businesses. These units are allocated across business lines and to the Group’slegal entities.Value at RiskValue-at-Risk (VaR) is a technique that estimates the potential losses that could occur on risk positions as aresult of movements in market rates and prices over a specified time horizon and to a given level of confidence.It is based on historical simulation and calculated on a daily basis. This model derives plausible future scenariosfrom past series of recorded market rates and prices, taking account of inter-relationships between differentmarkets and rates such as interest rates and foreign exchange rates.The model also incorporates the effect of option features on the underlying exposures.The historical simulation models incorporate the following features: potential market movements are calculated with reference to historical market rates and prices withreference to foreign exchange rates and interest rates, and the associated volatilities from the past 500 days;andHSBC Savings Bank (Philippines), Inc. 2019 Annual ReportPage 9

VaR is calculated to a 99 percent confidence level, for a one-day holding period, and based on exposuresoutstanding at close of business.HBPH routinely validates the accuracy of its models through back testing where the loss VaR and profit VaRmust be compared to both hypothetical profit and loss and actual profit and loss on a daily basis, and anyexceptions identified. Back testing is an important measure of the effectiveness of VaR models. This analysismay reveal potential mis-calibration in the VaR model, for example where profit and loss movements hadfrequently exceeded the value predicted by the model.Although a valuable guide to risk, VaR should always be viewed in the context of its limitations. For example: use of historical data as a proxy for estimating future events may not encompass all potential events,particularly those which are extreme in nature; use of a one-day holding period assumes that all positions can be liquidated or hedged in one day. This maynot fully reflect the market risk arising at times of severe illiquidity, when a one-day holding period may beinsufficient to liquidate or hedge all positions fully; use of a 99 percent confidence level, by definition, does not take into account losses that might occurbeyond this level of confidence; VaR is calculated on the basis of exposures outstanding at the close of business and therefore does notnecessarily reflect intra-day exposures; andVaR is unlikely to reflect loss potential on exposures that only arise under significant market movements.The Group and HBPH recognize these limitations by augmenting its VaR limits with other position andsensitivity limit structures.The Group and HBPH also apply a wide range of stress testing, both on individual portfolios and on theHBPH’s consolidated positions.The VaR for HBPH are as follows:In PHP ‘000December 31, 2019Average restRate19,02920,09529,9398,576Credit-In PHP ‘000December 31, 2018Average erestRate29,38141,71252,62229,178Credit-Stress Value at RiskStressed VaR is a 99th percentile 10-day VaR calibrated to a one-year period of stress observed in history.Stressed VaR is calculated from a 250-day stressed market conditions which would amount to a worse-casescenario. Stressed VaR (“SvaR”) must be calculated at least weekly. The SvaR measure must be based on inputscalibrated to historical data from a continuous twelve month period of significant financial stress relevant to theportfolio and is reported at 1 day holding period. The SvaR for HBPH are as follows:In PHP ‘000December 31, 2019AverageHighestLowestYE 20195074571,269203YE 20183559132,131203Management of Interest Rate Risk in the Banking BookInterest rate risk in the banking book (IRRBB) is the structural interest rate risk that arises due to the interestrate re-pricing mismatch between assets and liabilities in the regulatory banking book. The banking bookHSBC Savings Bank (Philippines), Inc. 2019 Annual ReportPage 10

includes assets and liabilities accounted for at amortized cost and/or at Fair Value Through OtherComprehensive Income (FVOCI).IRRBB Risk is: Monitored in line with the Group’s IRRBB risk framework. Primary oversight is delegated to the Assetand Liability Committee (ALCO) Measured using internal metrics such as Sensitivity of Net Interest Income and Economic Value Equity(EVE) Sensitivity, and is an integral risk assessed in the conduct of the annual Enterprise Wide StressTesting (EWST) exerciseSensitivity of net interest incomeA principal part of the Group’s and the Parent Company’s management of IRRBB is to monitor the sensitivityof projected net interest income under varying interest rate scenarios (simulation modelling). The Group and theParent Company aim, to mitigate the effect of prospective interest rate movements which could reduce futurenet interest income, whilst balancing the cost of such hedging activities on the current net revenue stream.For simulation modelling, businesses use a combination of scenarios relevant to local businesses and localmarkets and standard scenarios which are required throughout the HSBC Group.Interest rate shocks applied are as follows: (a) a parallel movement of plus or minus 100 basis points (bps) in allyield curves; and (b)a parallel movement of plus or minus 200 basis points (bps) in all yield curves; . Assumingno management actions, a series of such rises and declines would increase (decrease) planned net interestincome of the Parent Company and HSBC Savings Bank. This exercise is currently being done quarterly butwill be completed monthly starting March 2020.The interest rate sensitivities are based on simplified scenarios. It represents the effect of the pro-formamovements in net interest income based on the projected yield curve scenarios and the Group’s and the ParentCompany’s current interest rate risk profile. This effect, however, does not incorporate actions that would betaken by the Balance Sheet Management (BSM) or in the business units to mitigate the impact of this interestrate risk. In reality, BSM proactively seeks to change the interest rate risk profile to minimize losses andoptimize net revenues. The projections also assume that interest rates of all maturities move by the same amountand, therefore, do not reflect the potential impact on net interest income of some rates changing while othersremain unchanged. The projections take account of the anticipated net interest income impact of rate changedifferences between interbank interest rates and interest rates linked to other bases (such as BSP rates or productrates over which the entity has discretion in terms of the timing and extent of rate changes). The projectionsmake other simplifying assumptions too, including static balance sheet. The impact to net income and equity isequivalent to the impact to net interest income.Strategic RiskThe risks to business plans and strategic objectives resulting from poor execution, inability to adapt to changesin external environment, or failure to meet stakeholder expectations. This failure to meet stakeholderexpectations is also known as reputational risk, and it is a result of any event, behavior, action or inaction, eitherby HBPH, its employees or those with whom it is associated, that might cause stakeholder

HSBC Savings Bank (Philippines), Inc. 2019 Annual Report Page 2 HSBC Savings Bank (Philippines) Inc. (“HBPH” or “the Bank”) is a thrift bank, locally incorporated in the Philippines, and is a wholly-owned subsidiary of The Ho